The market notes

The Nature of Markets
A market is a place or situation where buyers and sellers exchange goods or services.
Because of specialisation we have become interdependent and rely on markets to exchange goods and services to satisfy our needs and wants.

Examples of places:	Examples of situations:
· shop · flea market, farmer’s market · department store · supermarket · garage sale · auction	· newspaper · internet · mail order · party plan · door to door · vending machines

The diversity of markets:
Size – small and localised e.g. corner dairy OR large and international e.g. diary or oil markets
Level of Competition – very competitive with lots of sellers of with little competition e.g. oil cartels; or monopolies (one seller) with no competition

How is price set in a market?
· The seller can set the price
· Auction – the buyers can offer a price via bidding (open bidding)
· Tender – the buyers can offer a price via bidding (closed bidding)
· Haggling or negotiation
· Sometimes the government set a price

Types of Markets:
Goods and services market
Resource market
Money market
Foreign exchange market

Satisfying needs and wants outside the market:
There are many non-market ways in which some groups in New Zealand make decisions when attempting to satisfy their unlimited wants

In non-market solutions there may still be demand and supply but exchange does not occur with the aid of money as a medium of exchange. Instead barter is used.

Examples of non-market activity include:
· Self Sufficiency · Green Dollars · Barter · DIY – Do it yourself	· Communal Living · Family/ whanau · Community Groups · Customary Rights

These non-market activities are not counted in the country’s official economic activity – GDP.
Different Solutions for different people:

Different means and values will affect how people meet their needs and wants
e.g. need for food can be satisfied by cooking at home, eating out, takeaways, employing a chef to cook for your, or cooking communally
e.g. Accommodation needs can be met by owning or renting a home, flatting or living with family.
Exchange

Exchange usually occurs with the aid of money BUT people can also barter.
Barter:
Barter means swapping goods and services for other goods and services. It requires a double coincidence of wants – someone has to have what you want and want what you have. It also creates a difficulty of determining a relative value of the exchange e.g. is a car worth a pig? Some goods are also not easily portable or divisible. Modern systems such as “green dollars” can overcome this.
The History of Money
Self Sufficiency (no need for money)
-> Specialisation
-> Barter
-> Commodity Money (precious metals)
-> Token Money (notes and coins)
-> Cheques
-> Credit Cards
-> EFTPOS and other Electronic transactions e.g. Direct Debit

Money as a means of exchange overcomes the main problem with barter. Money has more than just an exchange function though. It is also:
q A standard of value – it provides us a common measure to compare the value of goods and services e.g. we can compare the difference in value between a car and a diamond;

q A store of value – this enables saving, money must not lose its value over time;

q A means of deferred payment – this means money can be used as a form of credit – to buy now and pay later.

Legal tender:
Legal tender in NZ is any bank notes; $1 and $2 coins up to $100 and silver coins up to $5. Cheques are not legal tender.

New technology has provided a number of new means of exchange:
- EFTPOS (Electronic Funds Transfer at Point of Sale)
- Credit Cards
- Direct Debit
- Internet transfers etc.

The Rights and Responsibilities of Buyers and Sellers

Rights and Obligations

Obligations are responsibilities or duties
· Producers and consumers are obligated to pay their ‘bills’.
· Producers are obliged to obey consumer laws.
· Not fulfilling your obligations can impact on the rights of others.

Rights are those things that you can reasonably expect – the things that people are entitled to
· Producers have the right to be paid on time and in full.

Contract Law

Caveat Emptor - ‘Let the buyer beware’. This forms the basis of consumer law. (Max sign OHT)
Wise buyers:
ü Shop around – is there a better deal somewhere else?
ü Ask about any extra costs – delivery, additional warranties etc.
ü Ensure it is what you want – wrong size, colour etc – a mistake such as this is your problem.
ü Keep receipts – if there is a problem you will need these.


Contract Law
Contract - A formal agreement between two ‘parties’ that will be upheld by the law.
For a contract to be valid it must contain the following elements:

1. Intention: Both parties must have intended to form a contract (serious legal relationship, a contract must be serious and commercial e.g. an agreement to wash the dishes for your brother is not an enforceable contract).

2. Offer and Acceptance: One party must make an offer and the other must accept it. NB A price tag is an invitation to make an offer.

3. Capacity: Each party must be legally able to make a contract, i.e. one is not a minor, insane, drunk or bankrupt.
You must be adult, sane and sober. The Age of Majority Act 1970 states 20 as begin the age of an adult – this has been superseded in practice by the United Nations Convention on the rights of the child which uses 18yrs.

4. Consideration: Each party must contribute something to the contract, e.g. cash or goods. Some form of exchange must take place.

5. Consent: Each party must freely agree to the contract. There must not be duress/coercion or undue influence.

6. Legality: Contract can only be for legal activities.

A note about form: Simple contracts can be oral, written or implied. Complex/ formal contracts must be written e.g. a hire purchase agreement.

Acts of Parliament:

The Fair Trading Act 1986
Aims to protect consumers from dishonest traders who might “rip you off”. Covers advertising and selling for both goods and services.

The Fair Trading Act prohibits:
Ø ‘misleading or deceptive conduct’ (deliberately giving a false impression e.g. a model airplane comes in a metre long box but is only 10cm when made up);

Ø ‘false representation ‘ (deliberately telling lies) e.g. a table described as solid rimu is discovered to be rimu veneer over chipboard.

Ø certain ‘unfair practices’ e.g. offering free gifts with no intent to supply, bait advertising – advertising goods without intending to sell them at that price, in reasonable quantities or for a reasonable length of time.

Consumer Guarantees Act 1993
Covers goods and services purchased for personal or household use. Does not cover second hand goods, or purchase by auction or tender.

For goods the sellers obligations include:
ü Clear title – the seller must own the good and not owe money on it.
ü Acceptable quality – this protects you from buying faulty goods.
ü Fit for purpose – the goods must fit the purpose for which they are purchased i.e. they must do what the seller said they would.
ü Match the description – as described by the seller or from the advertisement, or in the catalogue if you are buying sight unseen.
ü Be like the sample – your purchase must match what you have seen in the store, or the sample you have viewed.
ü Access to spare parts and repairs – in the event something goes wrong.
ü Reasonable price - you do not need to pay more than a reasonable price. Remember to shop around.


When something goes wrong the seller has an obligation to:
Ø Repair it in a reasonable time;
Ø Replace it;
Ø Refund your money.
(The act requires that the seller must put things right, they cannot pass on responsibility to the manufacturer. KEEP RECEIPTS).
For services the obligations are:
ü Reasonable price – a reasonable price about the same that others would charge (if the price is not agreed on first) – remember caveat emptor – you should check the price first.
ü Quality – services must be provided with reasonable care and skill.
ü Time – a reasonable time frame if not agreed on beforehand – remember a wise buyer would check on this.
ü Performance – the provider of the service must do what you ask e.g. If a mechanic replaces your fan belt when it was your exhaust that you wanted fixing.


(The Fair Trading Act deals with goods and services before they are sold while the Consumer Guarantees Act deals with the quality of goods and services after they are sold.)



NB: (Door to Door Sales no longer in Assessment Specification

The Door to Door Sales Act 1967:
To protect consumers from high pressure or manipulative sales techniques (pushy sales people).

Main feature is a seven day cooling off period where you can cancel the agreement and receive back any money paid.

Covers credit purchases over $20 and cash purchases for goods and services over $40.

Market Equilibrium

To determine market equilibrium we combine supply and demand curves.

Market Equilibrium:
Market Equilibrium is the price where the quantity supplied is equal to quantity demanded.
If a product is sold for equilibrium price then everything supplied will be sold – we say that the market clears.

Excess Supply:
If price is above equilibrium – producers will supply more (law of supply) but consumers will demand less (law of demand) so their will be a situation of excess supply or a surplus.

What will happen?
Producers will want to sell their excess stock; they will discount until excess stock is sold and the market will return to equilibrium.

Excess Demand:
If price is below equilibrium then the quantity demanded will rise and the quantity supplied will fall (as the respective laws state). This will result in a shortage or an excess of demand .

What will happen?
Consumers are prepared to pay a higher price, as they compete for scarce products, they will bid the price up – price will return to equilibrium where the market clears.

Changes to Market Equilibrium - Relaxing ceteris paribus:

What will change supply?
Costs of production
Prices of related products
Changes in technology/ productivity
(Goals of producers)

What will change demand?
Changes in income
Changes in tastes and preferences
Change in the price of a substitute
Change in the price of a complement

A change in any of these factors will shift the supply and/or demand curves and will result in a new equilibrium price and quantity.

A shift in the demand or supply curves will initially create a shortage or a surplus, but as the laws of supply and demand dictate action, a new equilibrium will be restored.
Price Controls, Taxes and Subsidies
The questions to be asked in every economy are:
· What;
· How; and
· For Whom

In a free market economy, the forces of supply and demand answer these questions; in planned economies the government makes these decisions. Most economies are mixed – partly free market and partly planned. NZ is a mixed economy which has leaned further toward a free market economy since the mid 1980s.


Price Controls
In the past governments have intervened in the market when price have been too high or too low.

Minimum Prices:
A minimum price control is when a product is not allowed to be sold below a certain price level – the government sets the price of a good above equilibrium as the equilibrium price is considered too low.
e.g. 1980s SMPs for wool; minimum wages

The problem with minimum prices is that they create a surplus in the market – in the 80s the govt bought up excess wool supplies; a surplus in the labour market is unemployment.



Maximum Prices:
A maximum price control is when a good or service cannot be sold for more than a certain price set by the government – a price that is below equilibrium. Also called a price ceiling. The problem with a maximum price is that it creates a shortage. A shortage of goods may result in a black market situation arising – where buyers and sellers illegally trade at the higher price.

Maximum prices may also mean:
· Queues – first come, first served;
· Sellers only supply regular customers;
· Govt issues ration cards; and
· Black markets.
Taxes

The government also intervenes in the market by collecting taxes, either directly from income tax or indirectly via producers.

Direct taxes are taxes on income e.g. PAYE, Company Tax.
Indirect taxes are taxes on spending e.g. sales taxes, GST.


Changes in direct taxes:

What is the effect of a decrease in income tax?
A decrease in income tax will increase disposable income and therefore demand. The demand curve will shift to the right, equilibrium price and equilibrium quality increase.

What is the effect of an increase in company tax?
Companies pay tax on profits. If there is an increase in company tax, it increases costs of production, which decreases supply. The supply curve shifts left, equilibrium price increases and equilibrium quantity decreases.


Indirect taxes

Indirect taxes are taxes paid by producers; they are able to pass on at least some of this tax to the consumer.

Indirect sales taxes can discourage people from buying goods the government considers bad for them – demerit goods e.g. cigarettes.

An indirect tax increases costs of production and causes supply to shift to the left. This increases the equilibrium price and decreases equilibrium quantity.

The new supply curve moves up by the amount of the tax.
The increase in price is not as much as the amount of the tax.
The producer is able to pass some of the tax onto the consumer.
If all of the tax was passed on to the consumer, quantity demanded would decrease by too much. The producer must pay for some of the tax.
Subsidies

A subsidy is a payment made by the government to producers to encourage the consumption of merit goods. These are products that the government or society considers good for you e.g. pharmaceuticals, car seats, bicycle helmets.

The aim is to increase quality supplied and reduce price to the consumer.

Advantages are that price is lower, making the good/service more affordable and quantity is higher meaning that more people will have access to the good.

Disadvantages include the cost to the government that could be used on other goods and services and also the creation of inefficient industries that are reliant on government funding.
Subsidies can prevent competition from more efficient producers overseas and create barriers to free trade.

Graphing it.
Points to note:
The new supply curve moves down vertically by the amount of the subsidy.
Similar to an indirect tax the fall in price will not be as much as the amount of the subsidy. The producer will pass some of the subsidy onto the consumer.
The total cost of the subsidy can be worked out by multiplying the amount of the subsidy by the volume of sales at the new equilibrium.

Price and Non Price Competition

AS learning objectives:
· identification of the ways firms compete through price and non-price competition
· examination of the advantages and disadvantages, to both consumer and producer, of non-price competition

Firms operating in the same market place will compete for market share. They will use price or non-price competition strategies.

Price competition strategies involve reducing the price below your competitors so consumers will buy your product.
Non-price competition involves strategies other than price to entice customers to buy your product.

Price Competition:
Price competition occurs when firms reduce their price to attract more customers. This will increase market share though profit per item will be reduced; however quantity demanded will increase so producers will sell more.

The danger to producers who engage in price cutting is that a price war may ensue until the profit margin has been reduced so much that it is no longer viable to remain in business. When this is the case the remaining firms have greater market share but there is less choice and competition for the consumer.

Price competition strategies include:
Ø Discounts;
Ø Buy one get one free promotions;
Ø Interest free terms; and
Ø Loss leaders

The consumer is the winner in price competition in the short term – always shop around for sales.
Non-price competition

Because they recognise the dangers of price wars, most businesses prefer to use non-price competition strategies to attract customers to buy their products.
They recognise that consumers are looking for more than the lowest price.

With non-price competition there is no change to the selling price, but there is a cost to the producer for additional advertising, service, branding or other strategies used.

Non-price competition has two main forms:
Ø Product differentiation – which promotes apparent differences from competitors products; and
Ø Product variation – which promotes real differences in competitors products.

The purpose of non-price competition is to increase consumer demand for the good or service and shift the demand curve right.

Product differentiation:
· Sponsorship – designed to target potential customers associated with events or teams; gives brand exposure via media;
· Branding – includes colour and/or logo which identifies the product – it allows instant recognition e.g. Nike swoosh, yellow pages;
· Advertising – used for both price and non-price competition. Variety of media used to communicate messages to the public. Will communicate brand and or price;
· Packaging – allows a firm to reinforce brand by the use of colour and logo e.g. Cadbury and purple. Attractive or convenient packaging can also tempt consumers into purchasing a product.
· Location – Malls, foot traffic, parking, location near like businesses – all may give advantage.
· Competitions – can increase market share in the short to medium term. Prizes vary form small instant rewards to major prizes.
· Quality Service – at time of sale or after sales service.
· Gift with purchase – bonus products e.g. Farmers cherry on top.
· Loyalty programmes e.g. flybuys or AA rewards.

Product Variation:
This includes anything that is an actual difference from competitors products e.g. more advanced features in cars or fridges.

Price Wars:
Occur when there is aggressive price competition between businesses.
Can benefit consumers through lower prices
Can be costly to businesses that are involved and reduce their profits.
May result in less competition and higher prices for consumers is some businesses are forced out of the industry.


Advantages and Disadvantages of Non-price Competition

+ve For Consumer:
· better service
· wider choice
· better quality
· better packaging

-ve for consumer
· higher prices and producers pass on cost
· confusion with conflicting advertising
· false sense of choice resulting from product differentiation

+ve for producer
· increased market share
· increased sales and profits
· reduced chances of price war

-ve for producer
· increased costs of production
· reduced profits